The extent of hedge funds' selling in sugar and wheat may
herald a better price performance, limiting their appetite for further short
positions, investors said, as both agricultural commodities staged some revival.

Managed money, a proxy for speculators, trimmed its net long
position in futures and options in the top 13 US-traded agricultural
commodities, from cotton to cattle, by some 1,700 contracts in the week to
January 28, according to data from the Commodity Futures Trading Commission
regulator.

The return to a more negative view on agricultural
commodities, after two weeks of raising exposure to higher prices, reflected
largely an increase of nearly 6,000 contracts in hedge funds' net short in Chicago
wheat futures and options and a rise of nearly 2,300 lots in New York raw
sugar.

New York arabica coffee and cotton also witnessed
substantial selling.

'Oversold market'

However, the extent of speculators' net short in Chicago
wheat, now back some 10,000 lots from its record high set earlier in the month,
provoked ideas that - with prices already down 8% in 2014, and amongst their
lowest since 2010 - investors may prove less willing to bet on further declines.

This is especially so given a small rise, of 2.8%, in futures
in rival grain corn last month, signs of demand from importers at lower prices,
and some talk of damage to US and former Soviet Union winter grains crops from
cold weather.

"With wheat markets oversold and showing signs that they
have value, there's a good chance shorts in Chicago will be forced to cover
some positions," Brian Henry at Benson Quinn Commodities said.

"In addition to excessively cold temperatures, many key US
hard red winter wheat-growing regions have dealt with below-average
precipitation over the course of the last couple months".

Chicago wheat futures for March stood 0.2% higher at $5.56 ¾
a bushel as of 06:30 local time (12:30 UK time) – aiming at their first run of
three successive positive sessions since November.

'Spooking investors'

In raw sugar, in which hedge funds raised their bearish
positioning for a 13th successive week, to the highest net short
since July, the extent of the move has also provoked ideas that this trend has
gone far enough.

"Any slightly bullish news is capable of spooking those who
have shorted recently and have come late to the party," Nick Penney, senior
trader at Sucden Financial, said.

And indeed, raw sugar futures for March stood 0.8% higher at
15.68 cents a pound, up 6.7% from the three-year low for a spot contract set
last week.

Sugar boosts

The sweetener has been the subject of a cocktail price-positive
news, besides dryness in Brazil's Centre South region, which has raised concerns
over the 2014 cane crop, and delays to India's proposed sugar export subsidy,
although there are talks of further government discussions this week.

Speculators' net longs in New York softs, Jan 28 (change on week)

Cocoa: 77,461, (+8,063)

Cotton: 43,947, (-5,372)

Arabica coffee: -5,454, (-2,699)

Raw sugar: -58,657, (-2,277)

Sources: Agrimoney.com, CFTC

"We believe there are a number of less visible factors
working below the surface which may be causing incremental decreases in supply,
and which, taken together, could be sufficient to push the market higher," said
Marex Spectron, the London-based broker.

In India, the second-ranked producing country and top
consumer, the impact of low sugar prices in causing default on sugar mills'
payments to cane farmers "should lead to lower plantings for the next crop".

In Thailand, the second-biggest sugar producer, the drain on
farm support payments caused by low world market prices has meant that "the
stabilisation fund may simply be running out of money", prompting farmers to
turn back to cassava, Marex said.

In Brazil's Centre South, whatever the weather impact on
yields, a "lack of cash has certainly led to less husbandry - fertilizers,
pesticides, fieldwork – which must be beginning to have a negative effect on
yields".

Positive positioning

Among other crops, hedge funds continued, for a fourth
successive week, to reduce their net short exposure to corn to a six-month low,
a switch encouraged by ideas that relatively low prices of the grain compared
with wheat have encouraged consumption.

Speculators' net longs in Chicago livestock, Jan 28, (change on week)

Live cattle: 124,097, (+442)

Lean hogs: 45,930, (+4,617)

Feeder cattle: 9,480 (+478)

Sources: Agrimoney.com, CFTC

Speculators also turned more positive on New York cocoa futures
and options, raising their net long position back close to 78,000 contracts on
talk of a bigger-than-though world deficit in 2013-14, although such ideas
received a dampener from the International Cocoa Organization.

Hedge funds also continued to rebuild their net long in
Chicago lean hog futures, amid concerns over the extent of losses to the US
herd from porcine epidemic diarrhoea virus (PEDv), which has now spread to
Canada too.

Prices of summer lean hog futures have set a series of
contract highs.

The net long in live cattle was increased too, to its
largest since 2010, amid ideas of a squeeze on beef supplies ahead, a hangover
from feedlots' reluctance to take on animals last summer, when feed prices were
still high.